92: The Virtues of Focus
A focused approach to investing is easier and more enjoyable (and better).
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Focus
I recently listened to Chris Bloomstran’s interview with Steve Clapham on Behind The Balance Sheet (h/t Value Investing World). A comment Chris made about his research approach got me thinking about focus.
Chris made the comment that it takes him a long time to get through a 10K because he’s a slow reader. Not only that, his formative experience of losing a bunch of his own capital led him to demand of himself that he read everything. Chris doesn’t skip over the boilerplate sections of 10Ks and neither should you. It’s here in the footnotes, in the revenue recognition section, in the risks section, etc. that you gain insights.
Reading these I’d-rather-watch-paint-dry sections is just the type of work that a “good” analyst needs to do. You’ll learn how one company does it compared to a competitor or the industry. You’ll learn when a company deviates from its past or industry norms. And you’ll pick up on important contextual information that you simply can’t get anywhere else.
So what’s this all have to do with focus?
Warren Buffett-type value investors know the virtues of a focused portfolio. They can tell you how focusing on a few (no more than 10-15 companies) leads you to require more conviction before pulling the trigger and, in the end, expectations of better investment results over time. It’s a philosophy that I share.
Such an approach still requires a lot of work, however. And that’s where focus comes in. By limiting yourself to the few companies/industries that you think you know well you make the time to really dig into the weeds. I’ve known investors and analysts who drive themselves crazy during “earnings seasons”, the few weeks about a month after quarter-end when companies release results. These individuals feel they need to digest everything from every company to make changes to their portfolio and/or defend their positions to investors.
I just don’t have the time for it. Not that it’s not important. But I don’t feel I need to be “up” on every number a company releases. I need the time to really dig in and put myself in the mental framework to receive the new information by reading my past write-ups on the company, etc. Only then can I sort/place the new information in my brain. How others do it, I don’t know. The answer is they probably don’t. The knowledge likely sits in their short-term memory until the next earnings releases come out.
A focused portfolio means you have more time to stay on top of the companies you own and the industries in which they operate. It leaves time for the exploration of new investment ideas and expanding your circle of competence.
A focused approach to investing is just better.
Stay rational! —Adam
Well said and nicely written. Thank you.